Summary of a Recent
Judicial Development in
Perishable Agricultural
Commodities

Unpaid Produce Suppliers Awarded
Preliminary Injunction

Harrison M. Pittman
Staff Attorney

In an action brought by two unpaid produce sellers against a produce buyer, a purported produce buyer, and the purported buyer's principals seeking payment of amounts allegedly owed to the buyers, the United States District Court for the Eastern District of New York has ruled that the sellers established irreparable harm necessary to issue a preliminary injunction and a likelihood of success on the merits of their claims. Horizon Marketing v. Kingdom Int'l. Ltd., 244 F.Supp.2d 131, 139-40 (E.D.N.Y. 2003). The district court also ruled that the purported buyer was a trustee of a statutory trust created by the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, for the purpose of preliminary injunctive relief. Id. at 140-45.

Horizon Marketing ("Horizon") and Venida Marketing Co. ("Venida"), plaintiffs, were sellers of perishable agricultural commodities. See id. at 134. Kingdom International Limited ("Kingdom") and Dong Ku Ra Mi Corporation ("Dong"), defendants, were two New York companies that allegedly purchased large amounts of perishable agricultural commodities from the plaintiffs. See id. Ko-Yu Mo ("Mo"), also a defendant and a principal of both Dong and Kingdom, owned eighty-five percent of Kingdom and fifty percent of Dong. See id. (citation omitted).

The plaintiffs claimed that the defendants owed them $220,091.15 for commodities that were delivered during September and October, 2002. See id. at 135. The plaintiffs asserted that "they sold the produce to both Kingdom and Dong, believing that Dong was a 'division or trade name of Kingdom.'" Id. (citation omitted). Kingdom argued, however, that only Dong purchased produce and therefore only Dong should be subject to the plaintiffs' request for a preliminary injunction. See id.

The court explained that under the PACA "buyers of produce are required to hold proceeds from the sale of such produce in trust for the benefit of the sellers." Id. (citing 7 U.S.C. § 499e(c)). The statutory trust is created "at the moment the produce is shipped to the buyer and remains in effect until the seller is paid in full." Id. (citing 7 C.F.R. § 46.46(c)(1); In re Kornblum & Co., 81 F.3d 280, 286 (2d Cir. 1996)). The court also explained that under the PACA the produce buyer-- "in this case Dong or both Kingdom and Dong-therefore becomes a trustee and 'has a fiduciary obligation under PACA to repay the full amount of the debt owed to the PACA beneficiary.'" Id. (citation omitted). It added, "[b]uyers who dissipate or otherwise spend the proceeds of the trust without making full payment to the seller are in breach of their fiduciary duties . . . . The wrinkle in this case is deciding whether Kingdom is also a buyer/trustee, or whether Dong is the only liable corporate party." Id.

When the parties' business relationship began in Spring, 2002, Dong did not have a PACA license. See id. Without the license, Dong was unable to buy or sell produce. See id. (citation omitted). Mr. Mo claimed that the plaintiffs, as well as other produce suppliers, "agreed to sell produce to Dong, but bill Kingdom because [Kingdom] had a PACA license." Id. (citation omitted). Mr. Mo also claimed that Dong's customers "would pay Kingdom, which would deposit the proceeds of Dong's sales into [Kingdom's] account, and then issue its own check to Dong." Id. (citation omitted). According to Mr. Mo, the "'parties had agreed that once Dong received it[s] PACA license that it would become the purchaser of the commodities sold by Horizon and Venida. The fact remains that it was always Dong which purchased the product and it was always Dong which paid for the product.'" Id. (citations omitted). Thus, Kingdom argued that the court should not "disregard the separate corporate identity of each company, and recognize that since Kingdom 'never sold those commodities . . . never took custody of those commodities . . . never received these commodities or received any monies derived from those commodities,' it cannot be deemed a PACA trustee in this action." Id. (citation omitted).

The plaintiffs disputed Mr. Mo's testimony, asserting that they only agreed to sell to Kingdom, "relying on 'Kingdom's name, Kingdom's credit references, which were checked out[, and] Kingdom's license from the USDA to transact the produce sales and purchases.'" Id. The plaintiffs also asserted that under the PACA "the trust follows the produce, and regardless of who paid, Kingdom ordered the produce, accepted delivery of the produce, and received the proceeds of the sale of the produce." Id.

The plaintiffs filed a complaint against the defendants on December 11, 2002, along with a request for a temporary restraining order and preliminary injunction. See id. The defendants responded on December 17, 2002, filing Mr. Mo's affidavit in opposition and arguing that the plaintiffs' claims against Kingdom should be dismissed. See id. Thus, the issues before the court were whether the plaintiffs' motion for preliminary injunctive relief should be granted and whether the claims against Kingdom should be dismissed. See id.

To obtain a preliminary injunction, a party must show "'(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.'" Id. at 139-40 (citation omitted). The district court determined that the plaintiffs demonstrated a presence of irreparable harm and that they were likely to succeed on the merits. See id. at 140.

The court explained that the irreparable harm in this case was "the risk that a produce buyer will have dissipated the PACA trust without paying the produce seller, thus leaving the produce seller out of luck and out of money." Id. It added that if a seller "'cannot realize any returns on the sale of the crop when due, he may not be able to survive.'" Id. (citation omitted). The court stated that in this case "this danger has already materialized in that Dong is no longer in business and is in the process of liquidating its assets, which consist of approximately $80,000 in receivables to be shared between plaintiffs and six other creditors." Id. Thus, it concluded that "there is substantial risk of further irreparable harm and that injunctive relief is necessary to preserve the status quo." Id.

The court also explained that under the PACA a produce seller "loses the benefits of the statutory trust unless it informs the buyer of its intention to preserve its entitlement to the trust proceeds." Id. (citing 7 U.S.C. § 499e(c)(3)). The PACA permits a seller to give such notice by "'ordinary and usual billing or invoice statements,' which must include specific language informing the buyer of the seller's intention to preserve its rights to the trust." Id. (citing 7 U.S.C. § 499e(c)(3)). The court stated that

[P]laintiffs have submitted unpaid invoices, all of which bear the exact language required by the statute, thus satisfying the notice requirement and preserving their interest in the trust. Moreover, that plaintiffs are entitled to payment is not in dispute. No one has questioned, for instance, whether the produce that was delivered and accepted conformed to the relevant agreements. Having provided produce as required, and not having been paid as agreed, plaintiffs have established their entitlement to payment under PACA. The only issue in dispute is the identity of the buyer. Thus, the likelihood of plaintiffs' success on the merits, as to at least one-if not both-of the corporate defendants, is practically unquestioned.

Id.

The court also rejected Kingdom's argument that it should be dismissed as a defendant, stating that "[t]he documentary evidence offered in this case establishes that Kingdom purchased the produce at issue and is a PACA trustee." Id. at 140. It noted that the parties did not dispute the fact that Kingdom was the original buyer, since Dong did not have a PACA license when the plaintiffs began delivering produce. See id. at 140-41. "Most importantly," the court added, "the invoices and bills of lading indicate that the produce was sold and delivered to Kingdom." Id. at 141.

The court explained that

The PACA trust is impressed on produce that is "received" by a merchant, dealer or broker. PACA regulations define "received" to mean "the time when the buyer, receiver, or agent gains ownership, control, or possession of the perishable agricultural commodities." Since Kingdom is the cosignee in the bills of lading, it is the presumptive owner and receiver of the produce, and, hence, a PACA trustee . . . . In addition to the bills of lading, the original invoices produced by defendants also indicate that Kingdom was the purchaser of the produce, and is therefore liable to plaintiffs.

Id. (citations omitted).

Finally, the court noted that many courts have ruled that, in PACA actions, "individuals who are principals in corporations which bought produce, but failed to pay, are individually liable for breach of their fiduciary duties." Id. at 145 (citations omitted). It added that should either Kingdom or Dong "be found to be insolvent, Mr. Mo, as principal of both corporations, may be held liable to plaintiffs. At this point, however, [this court] makes no finding as to any individual liability, nor does the preliminary injunction issued herein affect Mr. Mo's personal assets." Id.

The case was decided on February 14, 2003; this summary was posted May, 2003